One after another potential partners are pulling out from the talk with Proton Holdings Bhd (KLSE: PROTON, stock-code, 5304). First, it was France’s PSA Peugeot-Citroen (EPA: UG) which pulled out. And now, the German auto giant Volkswagen AG (FRA: VOW) has scrapped plans for a tie-up with Malaysia’s ailing automaker Proton.

The Straits Times, citing a senior Malaysian government official, said Volkswagen delivered the news on Thursday (Mar-29-2007) to Khazanah Nasional, the government’s investment arm which is Proton’s main shareholder. It also quoted a Malaysian bank chief executive, who was aware of Volkswagen’s decision, as calling it “a major setback.” Khazanah holds a 42.74 percent stake in Proton. State pension fund EPF (Employees Provident Fund) and national oil firm Petroliam Nasional Bhd (Petronas) owns 12.07 percent and 8.84 percent respectively.

“Clearly, they don’t want to pour any resources into turning Proton around,” the newspaper cited the unidentified Malaysian government official as saying. It’s a no-brainer for such a deal. Who in the world would be idiot enough to help revitalize an ailing and screwed-up company without getting a good return of investment?

Maybe the government still thinks the Proton is one of the greatest human inventions since compass. Already Malaysia premier Badawi stressed the identity of Proton will remains in the history of mankind. Your guess is as good as mine if it’s willing to sell the majority stake to Volkswagen. At the same time, the government wants the new partner to turnaround the sick company to profitable soonest possible. Proton might have set some impossible conditions which are not viable from the business’ perspective. With all these childish conditions, it’s a matter of time before the talk collapse.

Malaysian Prime Minister Abdullah Ahmad Badawi last week also said Proton was in talks with Volkswagen AG and would turn to US auto giant General Motors Corp. (NYSE : GM, stock) if those discussions failed. Maybe he knows the talk with Volkswagen will fails with such a statement.

Malaysia has already extended the deadline for a decision once, after saying last November it aimed to announce a partner by the end of January. The government had set a deadline of this Saturday for announcing a partner for Proton but Malaysian Deputy Prime Minister Najib Razak said Wednesday the the deadline might not be met.

“But it doesn’t matter,” he was quoted as saying by the state Bernama news agency. If you read it right, the statement from Najib meant the government is not very particular concern if the talk goes through. Why set a deadline then if it’s not important? Losing money every quarter and it’s still not important enough to find a solution to it? Maybe losing face is much severe than losing hundreds of millions of dollars.

So it’s up to General Motors’s turn to harass Proton as it’s the only candidate left to become the strategic partner of Proton. Should the talk fails again you can see more of the taxpayers’ money goes into bailing out the pet project of former premier, Mahathir. With this latest news, Proton’s stock price might see continuous sell-down.